Governor Northam Addresses Money Committees

August 24, 2018

By Jim Regimbal, Jr. | Fiscal Analytics

In his address to the “money committees” on August 17, Governor Ralph Northam announced a $555.5 million General Fund (GF) revenue surplus for FY 2018. Other than the constitutionally-required 10 percent of surplus to be deposited to the Water Quality Improvement Fund (WQIF), the remaining surplus funds will be reserved, either in the Revenue Stabilization Fund or the new revenue reserve fund created last session. These funds will bring combined state GF reserves up to a total of $1.034 billion by FY 2020.

In FY 2018, GF revenues grew 6.3 percent versus the budget forecast of 3.4 percent. Individual income taxes accounted for a $614 million surplus – or more than the net total amount of surplus – which was offset by shortfalls in other revenue sources, such as corporate income and recordation taxes. $325 million of the surplus was due to non-withholding income tax collections. This volatile revenue will be assumed to be non-recurring for future revenue forecasting purposes, even though it now appears that much of the FY 2018 non-withholding gain was due to real wealth creation as opposed to tax planning gains. Secretary of Finance Aubrey Layne cautioned that approximately $120 million of the $227 million in surplus income tax withholding collections was the result of payments that would normally be collected in July but were instead collected on the last day of June. Removing this one-time accounting gain from FY 2018 would reduce withholding growth from 5.4 percent to 4.4 percent – still a healthy level of growth.

Sales tax growth was essentially neutral with its forecast, rising 3.1 percent in FY 2018. However, this was the best sales tax growth in recent years. Other revenue sources such as corporate income, recordation, and insurance premiums fell short of expectations. Transportation revenues likewise fell short of expectations – a cause for concern. GF revenue collections in July remained steady, giving further confidence to the re-forecast of 2018-20 biennium revenues that will occur this fall.

Next, Secretary Layne detailed the report from the Chainbridge Software consulting firm’s modelling of the 2017 federal tax changes’ impact on Virginia. The Chainbridge model estimates that additional Virginia revenue of $594.2 million in FY 2019 and $611.1 million in FY 2020 will result from the new federal tax law – if no changes are made to Virginia tax policy. These impacts would grow to $950 million by FY 2024. At that point, the individual income taxpayer provisions expire under current federal law. Business provisions are permanent. The impact of the business provisions would grow to substantial levels by FY 2024. While there are ten new federal tax provisions that impact Virginia taxes, the largest impacts result from the changes to itemized and standard deduction levels and the $10,000 federal tax cap placed on itemized state income taxes and local property taxes. This results in a change in taxpayer behavior regarding taking Virginia’s standard and itemized deductions that is expected to increase Virginia’s income tax collections.

Governor Northam proposed that $250 million of the state tax windfall resulting from federal tax changes be used to make the state’s earned income tax credit for low-income taxpayers (EITC) refundable. Virginia currently has an EITC, but it is not refundable beyond a taxpayer’s tax liability. Currently 24 states offer a refundable EITC, while another 6 (including VA) offer a nonrefundable EITC.

Next, Secretary Layne also discussed the recent Wayfair U.S. Supreme Court decision concerning the collection of sales tax on out-of-state internet sales. The Court held that states may require out-of-state internet sellers to collect sales tax, even if the seller does not have a physical presence in the state. The Court did not rule on the “undue burden” aspect of previous Supreme Court rulings. It is also not clear whether Congress will now weigh in on the subject. Secretary Layne presented a chart that estimated that if Virginia did require internet sellers to collect sales tax, an additional $250 million per year in state and local revenue would result. However, this estimate should be viewed with skepticism as a detailed estimate has yet to be performed.

Undoubtably, the 2019 Session will feature a lively debate on tax policy.

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